Taxpayers Subsidize March Madness

March 29, 2011

The schools participating in the National Collegiate Athletic Association (NCAA) men's basketball tournament nonprofit status is ostensibly designed to support their educational purpose. But the major sports programs of Division I schools make liberal use of that nonprofit status to burnish their bottom lines at the expense of the taxpayer, says Steven Malanga, editor for RealClearMarkets and a senior fellow at the Manhattan Institute.

Big-time college athletics have available another source of income not shared by pro sports, namely tax-deductible contributions by boosters to programs.

The CBO added, however, that these donations to major college sports programs increasingly "seem to be...primarily commercial," not charitable, in nature.

They are 'donations' in which donors receive a host of tangible benefits, from eligibility to purchase tickets to programs that sell out 100 percent of their tickets every year, to preferential seating for donors.

The endowments that athletic departments build up through these contributions provide the linchpin for even more fiscal maneuvering in the form of what the CBO calls higher education's "indirect" tax arbitrage. Here's how it works:

Universities and colleges are eligible to use tax-exempt debt to finance many of their capital projects, including building sports facilities.

Universities engaged in these construction projects often have big endowments but still prefer to use tax-free debt to finance building.

They gather donations, invest them in taxable securities that produce a higher rate of return than the interest the schools must pay out on their muni borrowing, and then they bank the difference.

While it is illegal to use to proceeds from low-cost muni debt to invest directly in higher yielding taxable securities, building a university field house becomes an opportunity to skim off a few extra dollars in so-called indirect arbitrage, courtesy of the taxpayer.

The exemptions get harder to justify when the moneymakers like football and basketball at the Division I level seem increasingly to be functioning as minor leagues for pro leagues rather than as paths to diplomas, says Malanga.